Vantage point


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Vantage point

  1. 1. 21 8 72 63 4 51
  2. 2. 21 8 72 63 4 51
  3. 3. Business Analyst Vantage Point # 1Balance Sheet - Breakup of Capital Employed, Capital StructureIncome Statement - Margins, Turnover,Cash Flow - reconciliation with income, maintenance capex.Interpretation - Capital requirements, Return on Capital, Business Volumes
  4. 4. Balance Sheet
  5. 5. Average net fixed assets over 6 years = 109 cr.
  6. 6. Surplus cash of Rs 173 cr or Rs 114 per share
  7. 7. working capital for each of the last six years = -30 cr, -68 cr, -87 cr, -124 cr, -94 cr, -96cr. Average = -83 cr.
  8. 8. IncomeStatement
  9. 9. Cash FlowStatement
  10. 10. Total cash flow generated from operations for 6 years = Rs 567 cr.Annual Average = 94 cr. Since last two years were less than average, we assume March 10 assustainable i.e Rs 81 cr.
  11. 11. Average Cash Flow from Operations = Rs 83 cr. p.a.Average Capital Employed in the Business = Rs 26 cr. Average return on capital = 319%What’s causing this business to be insanely profitable?
  12. 12. Indirect TaxesOut of Rs 1158 cr of gross revenues the govt takes away 663 cr.
  13. 13. Why does capital employed not go up?Business is not capital intensivecompany pays most of its earnings out as dividends
  14. 14. Direct TaxesOut of a PBT of Rs 85 cr, the govt takes away 27 cr.
  15. 15. Prudent Banker Vantage Point # 2How much money would you lend to this business?What are the key factors?Size, Interest Cover, CyclicalityWhat is the company’s debt capacity on a per share basis?Rs 81 cr cash flow/ Interest cover 3 times. Rs 27 cr of interest. Assume interest rate of 9%p.a.. Debt capacity = Rs 300 cr.No of shares = 1.54 cr. So debt capacity of the BUSINESS per share = Rs 195. Cash is Rs 114per share. So value per share can’t be less than 309. Why? Why can the business NOT beworth less than Rs 300 cr or Rs 195 per share? Has it sold below debt capacity?
  16. 16. debt can be paid off in 7 years
  17. 17. Shrewd Value InvestorVantage Point #3
  18. 18. “An equity sharerepresenting the entire business cannot be less safe [and lessvaluable] than a bond having a claim to only a part thereof.”
  19. 19. “There are instances where an equity share may be considered sound because it enjoys amargin of safety as large as that of a good bond.
  20. 20. “This will occur, forexample, when a company has outstanding onlyequity shares that underdepression conditions are selling for less than the amount of the bonds that could safely be issued against its property and earning power.
  21. 21. “In such instances theinvestor can obtain the margin of safetyassociated with a bond,plus all the chances of larger income and principal appreciation inherent in an equity share.”
  22. 22. “Our research seeks to appraise theintrinsic value of a share of stock byestimating its acquisition value, or by estimating the collateral value of its assets and/or cash flow.
  23. 23. Bond Fund Manager Vantage Point # 4How can a bond market value a PART of the business for less than what the equity is valuingthe WHOLE DEBT FREE COMPANY for?
  24. 24. HenryKravis LBO Artist Vantage Point # 5
  25. 25. In 6 years Kravis can pay off all the debt. What will he now own?
  26. 26. MM’s Vantage Point # 6MM on Capital Structure
  27. 27. MM on Capital Structure
  28. 28. Value Oriented Manager Vantage Point #7Special Dividend.Buyback:
  29. 29. MM on Capital StructureMM on Dividend
  30. 30. My Own Vantage Point # 8How to get closer to the truth….. - look at multiple points of view.look at broad picture - zoom out - look from civilization point of view… Why is this company prospering?What can go wrong? Increased Regulation - increased taxes, ban on advertising Ban on smoking? Can it happen?Dependence on tax revenues. Why does it exist in the first place? If it did not exist, would it be allowed today? Why is itallowed?Drop in smoking itself…Medical costs not borne by tobacco. What if they were?Virtue and Vice Effects
  31. 31. Virtue and Vice Effects
  32. 32. Vice Effects
  33. 33. My Own Vantage Point # 8The truth is that VST is prosperous because its involved in a vice where it the benefits are enjoyed by itsstockholders while the costs are borne by society. How long can this last? I don’t have good answer tothat question. Life is cheap. Money is expensive. Will you buy the stock, and overlook the vice effects?Maybe not. But, at a price, maybe you would. You see man is not rational animal. Rather he is arationalizing one. You do know now however, that you get closer to the truth by seeing different pointsof view, some of which are wrong. And that by itself is quite something. Isn’t it?
  34. 34. Thank You